Do Federal Reserve Communications Help Predict Federal Funds Target Rate Decisions?
MAGKS Discussion Paper No. 25-2009
22 Pages Posted: 12 May 2009 Last revised: 11 May 2010
Date Written: May 11, 2010
We explain federal funds target rate decisions using macroeconomic variables and Federal Reserve communication indicators. Econometrically, we employ an ordered probit model of a Taylor rule to predict 75 target rate decisions between 1998 and 2006. We find, first, that our communication indicators significantly explain target rate decisions and improve explanatory power in and out of sample. Second, speeches by members of the Board of Governors and regional presidents have a statistically significant and equal-sized effect, whereas the lessfrequent monetary policy reports and congressional hearings are insignificant. Third, our findings are robust to variations in the specification, including changes in the communication strategy. Finally, our communication indicator based on Federal Reserve speeches performs better in explaining target rate decisions than do newswire reports of Fed communications.
Keywords: Central Bank Communication, Federal Reserve Bank, Interest Rate Decision, Monetary Policy, Federal Funds Target Rate, Taylor Rule
JEL Classification: E43, E52, E58
Suggested Citation: Suggested Citation